Operating Leases and the Proposed Accounting Standards

The big question looming over the proposed accounting changes, is how will big business deal with the disappearance of operating leases? 
I'm not an expert, however I can tell you a few things for certain. First, most companies lessors and lessees are hiring accountants with heavy international experience in real estate. Second, the financial accounting impact is not going to result in competitive disadvantage since all companies must comply. Third, there will be differences in the overall adjustments experienced depending on how mature the leases are with respect to tenant occupying the space.

The valuation topic will pick up more steam and perhaps the number of options to renew included in the original lease will be reduced, basically the leases may be written differently. Overall there will be more transparency as to financing strategy in companies who have chosen to lease all locations rather than invest in capital assets - the wirelesss telecom industry generally leases all tower locations or builds to suit on leased land. There are many discussion brewing within this industry regarding how to move froward with new tower locations.

Most important at this moment is to prepare the shareholders for drastic changes in reported numbers. Applying the proposed changes will mean putting most of your leased assets on balance sheet, which will result in changes of businesses financial performance indicators, such as ROI. It will also affect the structure of earnings statement, as the expenses will be moving lower in your income statement. It is also important that some bank covenants may be affected. The preparation for such changes requires careful management of expectations, from both, shareholders and banks.

Bottom line, business will adjust and continue on, still exercising the option to pay cash or lease. The leasing industry will continue to grow and evolve with the changes likely to be put into effect (Mid- 2011).  New products and offerings will still add value for businesses and will continue to be a great option to keep operating cash clear, as well as other advantages.